Part E PREPARING A TRIAL BALANCE Part E Chapter 14: Control accounts Chapter 15: Bank reconciliations Chapter 16: Correction of errors Chapter 17: Preparation of financial statements for sole traders Chapter 14 CONTROL ACCOUNTS Learning Objectives What are control accounts? Discounts The operation of control accounts The purpose of control accounts What are control accounts? A control account is a total account • Its balance represents an asset or a liability which is the grand total of many individual assets or liabilities • These individual assets/liabilities must be separately detailed in subsidiary accounting records, but their total is conveniently available in the control account ready for immediate use What are control accounts? • Most businesses operate control accounts for trade receivables and payables, but such accounts may be useful in other areas too, e.g sales tax • With regard to the double entry relating to receivables and payables, note the following – The accounts of individuals are maintained for memorandum purposes only – Entering a sales invoice, say, in the account of an individual receivable is not part of the double entry process Discounts A discount is a reduction in the price of goods or services Discounts • A supplier may have a list price at which he is prepared to provide his goods or services to the majority of customers However, there may be reasons which justify a lower price or discount to particular customers or categories of customer • It is useful to distinguish between three classes of discount – Trade discount is granted to regular customers, usually those buying in bulk quantities – Cash discount is granted to customers who are prepared to pay immediately in cash or by cheque, instead of purchasing on credit terms – Settlement discount is granted to credit customers who pay within a specified period from the invoice date Discounts • Cash discount and settlement discount are similar in nature – The cost of the discount to the supplier is in the nature of a financing charge, and this should be shown as an expense in the income statement – Discounts received by the customer are a credit in the I/S • Trade discount is essentially different in nature – It is genuinely a reduction in the selling price made in order to attract a higher level of business – For this reason, it is accounted for as a reduction in the value of sales turnover or purchase cost shown in the income statement The operation of control accounts • The invoices in the sales day book are totalled periodically and the total amount is posted as follows • Similarly, the total of cash receipts from receivables is posted from the cash book to the credit of the receivables control account • In the same way, the payables control account is credited with the total purchase invoices logged in the purchase day book and debited with the total of cash payments to suppliers 10 The purpose of control accounts Reasons for maintaining control accounts It is worth bearing in mind the main reasons for maintaining both individual accounts and a control account • The individual accounts are necessary for administrative convenience For example, a customer may wish to query the balance he owes to the business; to deal with his query, receivables ledger staff would refer to his individual account • The control accounts provide a convenient total which can be used immediately in extracting a trial balance or preparing accounts • A reconciliation between the control account total and the receivables ledger will help to detect errors, thus providing an important control 11 The purpose of control accounts Proforma control account reconciliation 12 The purpose of control accounts TOTAL OF BALANCES EXTRACTED FROM RECEIVABLES LEDGER Note Follow the same approach for payables ledger control account reconciliations 13 The purpose of control accounts • It is the adjusted balance that appears in the final set of accounts • Possible reasons for credit balances on receivables ledger accounts, or for debit balances on payables ledger accounts – Overpayment of amount owed – Return of goods – Payment in advance – Posting errors 14 [...]... individual account • The control accounts provide a convenient total which can be used immediately in extracting a trial balance or preparing accounts • A reconciliation between the control account total and the receivables ledger will help to detect errors, thus providing an important control 11 The purpose of control accounts Proforma control account reconciliation 12 The purpose of control accounts TOTAL...The purpose of control accounts Reasons for maintaining control accounts It is worth bearing in mind the main reasons for maintaining both individual accounts and a control account • The individual accounts are necessary for administrative convenience For example, a customer may wish to query the balance he... approach for payables ledger control account reconciliations 13 The purpose of control accounts • It is the adjusted balance that appears in the final set of accounts • Possible reasons for credit balances on receivables ledger accounts, or for debit balances on payables ledger accounts – Overpayment of amount owed – Return of goods – Payment in advance – Posting errors 14 ...Part E Chapter 14: Control accounts Chapter 15: Bank reconciliations Chapter 16: Correction of errors Chapter 17: Preparation of financial statements for sole traders Chapter 14 CONTROL ACCOUNTS. .. ACCOUNTS Learning Objectives What are control accounts? Discounts The operation of control accounts The purpose of control accounts What are control accounts? A control account is a total account... purpose of control accounts Reasons for maintaining control accounts It is worth bearing in mind the main reasons for maintaining both individual accounts and a control account • The individual accounts